Securities Industry Commentator by Bill Singer Esq

February 20, 2019

UC Santa Cruz Student Indicted For Selling Drugs Through Software Application (DOJ Release) Riley Howard, all of 18 years of age, managed to get himself indicted in the United States District Court for the Northern District of California. The Indictment charges Howard with one count each of distribution and possession with intent to distribute cocaine; distribution and possession with intent to distribute methamphetamine; distribution and possession with intent to distribute methamphetamine; and  possession with intent to distribute methamphetamine. Imagine getting into all that trouble by such a tender age. To Howard's credit (or discredit) he managed to combine the world of illicit drugs with the world of high-tech (okay, maybe low-tech) via his development apps by which he allegedly sold drugs -- clearly the entrepreneurial spirit is alive and well and stoned in America! Calling Officer Krumpke!! As asserted in the DOJ Press Release:

An affidavit filed by a Homeland Security Investigations agent in connection with a search warrant alleges that Howard developed the "Banana Plug" application, which was available on the Apple App Store. The Banana Plug App offered for sale contraband, including cocaine, "Molly," and "Shrooms." The app also invited customers to make special requests.  Posters advertising the application had been hung up around the UC Santa Cruz campus. Upon discovering the posters and the application, a UC Santa Cruz police officer, in coordination with HSI, used the application to request a purchase of marijuana and cocaine and then communicated with Howard via Snapchat to set up the purchase. An undercover HSI agent made that purchase and separately continued to communicate with Howard on Snapchat to set up three additional purchases of controlled substances. The third and fourth purchases were for more than 5 grams of methamphetamine. At the fourth meeting, UC Santa Cruz police officers arrested Howard before any payment was made.

Concurring FINRA Arbitrator Pens Impassioned Rationale For Expungement
In the Matter of the Arbitration Between Walter E. Ryan, Claimant, v. Wells Fargo Advisors, LLC, Respondent (FINRA Arbitration Decision 17-00246 / February 14, 2019)
In a FINRA Arbitration Statement of Claim filed in January 2017, public customer Ryan asserted:

unsuitability and breach of duty to supervise. The causes of action relate to Claimant's investments in the following commodity based securities: LinnCo, LLC ("LinnCo"); Kinder Morgan, Inc. ("Kinder"); The Williams Companies, Inc. ("Williams"); and Potash Corporation of Saskatchewan Inc. ("PCS"), collectively referred to as the "Four Securities." 

Claimant Ryan sought $1,709.377 in damages plus $36,682 in interest, and at least $2,000 in costs and fees. Respondent Wells Fargo generally deneid the allegations and asserted various affirmative defenses. On March 6, 2018, the parties settled; thereafter,,  two non-parties moved to intervene in order to obtain an expungement of information from their industry records. The FINRA Arbitration Panel recommended the sought expungements.

As As set forth in part on pages 6 - 7 of the FINRA Arbitration Decision under the  section "Decision of the Concurring Arbitrator Kenneth L. Mann," we are informed in part of the following:

This Arbitrator concurs that expungement is well-deserved and agrees in all material respects with the forgoing opinion. As a matter of professionalism, however, he writes to elaborate upon the facts and law supporting his concurrence, because he perceives it is his duty to the judiciary, FINRA, and Claimant's counsel to do so in light of his prior dissents to an order prior to settlement, containing several discovery rulings that were adverse to Claimant, and to the post-settlement order granting the Motion to Intervene to seek expungement herein. 

Additionally, this Arbitrator would have objected -- and if unsuccessful, would have dissented to the clearly inappropriate in terrorem language in paragraph 8 of the June 1 Order that scheduled the expungement hearing -- if the Chair had first shared a draft of it with the Panel for our input (as judicial panels do, and as arbitral panels in this Arbitrator's 20+ years' experience as an arbitrator also do). Presumably, he didn't send us a draft because of inadvertent oversight or distraction, e.g., an emergency or an imminent trip to a location where he would lack internet access). Paragraph 8 was directly contrary to FINRA's rules that not only require Claimants be notified of expungement hearings but that they be invited to participate, not threatened with adverse consequences if they do so. 

Unfortunately, due to unrelated personal circumstances, this Arbitrator did not become aware of the June 1 Order nor of the Memorandum until mid-July and because of the extended lapse of time, coupled with a perceived likelihood of futility in belatedly dissenting in light of his unsuccessful objections to the prior orders, this Arbitrator refrained from dissenting to paragraph 8 of the June 1 Order. 

Considering the clear in terrorem purpose and effect of paragraph 8, it was totally understandable that neither Claimant nor his counsel attended the hearing in person, by phone, or video but relied solely upon the Memorandum. The Memorandum consisted of: a two-page cover letter dated June 29, 2018; an 11- page legal memorandum; a table of exhibits; and 53 pages of exhibits. The Memorandum was identified and introduced on the record by the Chair at the outset of the expungement hearing. . . .

In the ensuing half a dozen or so pages, Arbitrator Mann offers a meitculous analysis of the conduct of the arbitration and the issues involved. Ultimately, the Arbitrator concludes on pages 12 - 13 with these thoughts: of the FINRA Arbitration Decision under the "Decision of the Concurring Arbitrator Kenneth L. Mann":

Claimant also asserted in the Memorandum that expungement should additionally be denied pursuant to FINRA Regulatory Notice #17-42. However, the Regulatory Notice was not an existing rule or policy but was only being proposed by FINRA; and to date, it appears that FINRA is either: still reviewing and evaluating the comments and suggestions it received from the SEC and others; or in the process of formulating a revised proposal in response.1 Although the comments from the SEC's Office of the Investor Advocate ("OIA") praised FINRA's efforts and indicated it is "largely supportive of the proposed procedural changes," it did take issue with several of them and offered some suggestions. 

This Arbitrator acknowledges that the comments from the OIA very much shared FINRA's concern that a detailed study had found approximately 80% of all expungement requests have been granted-which suggested to FINRA and the OIAthat the process is not materializing as the "extraordinary" remedy it was intended to be. However, regardless of what those statistics may mean on a composite basis, this panel is obligated to adjudicate this case on the operative facts in this case. We have done so. 

With no disrespect intended, but with due regard to the weight and totality of the evidence, Claimant's assertions of being misled, etc. by Respondent, Marsteller and Bradshaw remind this Arbitrator of the parable about the preacher who, in the midst of a hurricane flooding his city, and a police motorboat coming down his street to urge him to come to the boat and evacuate, responded from his front porch: "NO! I am a man of God. I have faith in the Lord." An hour later, even though the flood waters had continued to rise, and the preacher had climbed of necessity to the second story, when a police motorboat again came down the street and urged him to come aboard and evacuate, the preacher gave the same response. Finally, after another hour of torrential rains, and by now the preacher having had to climb to the roof to keep from drowning, the police sent a helicopter, dropped a rope ladder, and pleaded with him for a third and emphatic final time to climb aboard the helicopter. He again declined; the helicopter left; the floodwaters continue to rise; and he drowned. 

When the preacher got to heaven and met St. Peter at the gates, he asked St. Peter why God had abandoned him and let him drown in view of his long history of living a pious and religious life. St. Peter looked up heaven's file on the preacher and responded incredulously: "What you mean ‘abandoned'? According to our records, God did try to save you. He sent you two motorboats and a helicopter." 

In summary, and with all due respect and credit to Claimant for his lifetime accomplishments, Marsteller and Bradshaw are entitled to expungement because the overwhelming weight of the evidence - not only by a preponderance of the evidence, nor even by clear and convincing evidence, but beyond a reasonable doubt - indicates that the claims asserted on behalf of Claimant in the SOC and subsequently are, at the very least, clearly erroneous. Before investing in the Four Securities , Claimant knew well and accepted the inherent risks of investing in equities, especially those dealing with commodities, and that those risks were accentuated that much more when investing on margin. Yet he sought recovery herein as if he had a bona fide insurance claim against his insurance company. 

For all of the forgoing reasons, this Arbitrator is now convinced that this is a case in which expungement should be granted.
In furtherance of a regulatory settlement, FINRA fined and suspended a registered representative for allegedly failing to provide his employer firms with prior written notice of two outside business activities and an away brokerage account. Not exactly earth-shattering news, but given the frequency with which such violations occur and are sanctioned, now is as good a time as any to highlight the issues and consequences.  

FINRA AWC Orders $2 Million Restitution For Front- and Back-End Funds Charges. In the Matter of Matthew B. Marietta, Respondent (AWC 2019061078801, February 19, 2019).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Matthew B. Marietta submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Matthew B. Marietta a $10,000 fine, a 14-month suspension in all capacities, and a requirement to requalify as a research analyst via the Series 86/87. The AWC asserted that in January and February 2017, Marietta authored four research reports about Issuer A without disclosing that he was engaged in advanced employment discussions with the company, in violation of FINRA Rules 2241(c)(4)(I), 2241(e), and 2010. As set forth in part under the AWC heading "Facts and Violative Conduct":

While at the Firm, Marietta was an equity research analyst covering companies in the energy sector, including Issuer A. In early January 2017, Issuer A was seeking a full-time employee to handle investor relations ("IR"). At the time, an outside consulting firm was performing that function for the company. On January 13, 2017, the Firm issued a research report authored by Marietta in which he expressed the view that Issuer A's intention to hire a full-time IR representative was a positive development. The report also reiterated his overweight rating, L e., expecting the stock's total return to be greater than the total return of the company's industry sector, on a risk-adjusted basis, over the next 12 months. 

Soon thereafter, Marietta began speaking with Issuer A about potentially becoming the company's IR representative. On January 26, 2017, Issuer A reached out to Marietta to schedule a meeting to further discuss the IR position. By this point, the discussions had reached a level of seriousness, with mutual expressions of interest and Marietta's candidacy clearly viable, such that he should have known that his employment discussions presented a material conflict of interest. . . .
The SEC proposed a rule and related amendments under the Securities Act to enable issuers to use test-the-waters-communications with certain institutional investors regarding a contemplated registered securities offering prior to/following the filing of a registration statement. Pointedly, proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral/written communications with potential investors that are, or are reasonably believed to be, Qualified Institutional Buyers ("QIBs") or  Institutional Accredited Investors ("IAIs"), either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering. READ the SEC Rule Proposal